Excerpt:.....and substituted by section 40a(5). there were two sets of question before their lordships : (i) expenses in respect of cars which were used both for business of the company and the personal use of the employees and (ii) expenses on the maintenance and upkeep of the residences which were given rent-free to the employees. these questions had to be answered both under the provisions of section 40(a)(v) as well as section 40a(5).3.4 the submissions of the department and the answers of the high court in respect of cars cover the report up to page 13. the department's submission in respect of the second question viz., residential premises as per section 40(a)(v) are in the 3rd para at page 13. pages 14 to 17 are devoted to the analysis of the earlier decision of the kerala high court in.....

3. Ground Nos. 4 to 9 deal with the disallowance to be made under Section 40A(5) of the Income-tax Act, 1961 ('the Act'). Each ground deals with a distinct aspect of the disallowance.

3.1 The first objection of the department is the finding of the Commissioner (Appeals) that the expenditure incurred by the company on the repairs and maintenance of the flats used by the officers should not be considered for the purpose of processing the disallowance under Section 40A(5). This point had also come up before the Tribunal in the prior assessment years. The Tribunal had decided the issue in favour of the assessee-company. However, Shri Krishnan, for the department, submitted that this decision of the Tribunal in the prior years requires review. According to him, this point is now covered by the decision of the Kerala High Court in the case of CIT v. Forbes, Ewart & Figgis (P.) Ltd. [1982] 138 ITR 1 (FB). Shri Gautam Doshi, for the company, on the other hand, submitted that the Kerala High Court would not apply in respect of buildings leased by the company ; it would apply only to buildings which are owned by the company. Where buildings are owned by the company, he submitted, the point was already decided by the Kerala High Court in the case of CIT v. Travancore Tea Estates Co. Ltd. [1980] 122 ITR 557. He further submitted that, in any case, since the flats are in a Co-operative Housing Society, the society and not the company, is the owner thereof.

3.2 It is, no doubt, true that the issue was considered by the Kerala High Court in the case of Travancore Tea Estates Co. Ltd. (supra).

However, that was a decision given in interpreting Section 40(a)(v). We are considering the provisions of Section 40A(5). There is a difference in the wording of the section. While we accept the assessee's submission that the decision of the Kerala High Court in Forbes, Ewart & Figgis (P.) Ltd.'s case (supra) would apply only to assets owned by the company and not the assets taken by the company on lease. We must point out that the later decision is a Full Bench decision and its rulings must be considered as having great or persuasive authority. We are, however, unable to accept the distinction sought to be made by Shri Doshi between ownership of the flats by the company and ownership of the flats by the Housing Society. As Shri Krishnan pointed out, Section 40A(5) nowhere requires that the company should be the owner of the building.

3.3 We will now consider the decision of the Full Bench of the Kerala High Court in detail. Their Lordships were considering the provisions of Section 40(a)(v) as well as Section 40A(5). It would be remembered that Section 40(a)(v) was in the statute till 1971-72 when it was deleted and substituted by Section 40A(5). There were two sets of question before their Lordships : (i) expenses in respect of cars which were used both for business of the company and the personal use of the employees and (ii) expenses on the maintenance and upkeep of the residences which were given rent-free to the employees. These questions had to be answered both under the provisions of Section 40(a)(v) as well as Section 40A(5).

3.4 The submissions of the department and the answers of the High Court in respect of cars cover the report up to page 13. The department's submission in respect of the second question viz., residential premises as per Section 40(a)(v) are in the 3rd para at page 13. Pages 14 to 17 are devoted to the analysis of the earlier decision of the Kerala High Court in Travancore Tea Estpies Co. Ltd.'s case (supra) and how that decision is not acceptable to the Full Bench. The only paragraphs containing direct discussions on Section 40A(5) are repreduced below : There can be no scope for any ambiguity in regard to the meaning of the corresponding provision as it stands in Section 40A(5) after that was incorporated with effect from April 1, 1972. As we indicated earlier, there is no reference to 'such employee' in that section. That provision contemplates disallowance of deduction in excess of the specified limit where the assessee incurs directly or indirectly any expenditure or is entitled to any allowance in respect of any assets of the assessee used by 'an employee' either wholly or partly for his own purpose or benefit. The use of the expression 'an employee' in Section 40A(5)(a)(ii) makes the matter clear beyond doubt. Therefore, the answer in respect of cases arising for the assessment years 1972-73 and later years presents no difficulty.

In the light of the above discussion, our answer to question No. 2, in ITR 44 of 1979, which concerns the section as it stood prior to April 1, 1972 and to similar questions in the other cases, is in favour of the revenue and against the assessees. The Tribunal was not right in law in allowing the expenses incurred for the maintenance of the buildings beyond the limit specified in Section 40(a)(v) of the Act for the period when that provision was in force and the corresponding limit specified in Section 40A(5) of the Act for the years when that section was in force. (p. 18) 3.5 Now, a reading of the decision of the Full Bench gives the impression that a rent-free accommodation given to the employee would be covered by the expression 'any assets of the assessee used by the employee either wholly or partly for his own purposes or benefit', occurring in Section 40A(5)(a)(ii). It seems to have been conceded so ; there is no discussion in the order of the Full Bench on this point.

(ii) incurs any expenditure which results directly or indirectly in the provision of any perquisites (whether convertible into money or not) to an employee or incurs directly or indirectly any expenditure or is entitled to any allowance in respect of any assets of the assessee used by an employee either wholly or partly for his own purposes or benefit, Three types of limits are contemplated in this clause. First, expenses incurred directly or indirectly in the provision of a perquisite ; second, expenses incurred directly or indirectly in respect of any assets of the assessee used by an employer either wholly or partly for his own purpose or benefit; and third, allowances in respect of the assets of the assessee used by an employee.

3.7 Now, the Full Bench, while discussing the similar provisions of Section 40(a)(v), bad noticed the department's contention on this point, thus : According to the revenue the expenses by way of maintenance on buildings belonging to an assessee occupied by an employee as rent-free accommodation may not fall within the first limb of Section 40(a)(v) but it will fall within the second limb of that Sub-section. No doubt the provision of rent-free accommodation is a benefit or amenity or perquisite. But it is said for the revenue that the expenses on the maintenance of the building is an expense on the building and, therefore, it is not an amenity or perquisite to an employee. According to the revenue that will fall within the latter limb because it is an expenditure in respect of an asset of the assessee used by the employee....(p. 13).

3.8 The question is contested before us and, therefore, we have to give a finding whether provision of a rent-free accommodation is to be considered as a perquisite or under the category of assets used by the employee. In our opinion, the expenses incurred by a company have to be considered only as providing a perquisite. That is because of the definition of perquisite in Explanation 2(b)(i). Rent-free accommodation provided to the employee is specifically brought in as a perquisite. Now, we have noticed that there are three types of expenditure covered by Section 40A(5)(a)(ii). When one type of expenditure is covered by 'perquisite', it appears to us, it cannot be considered again as 'an asset used by the employee'. A rent-free accommodation, as in this case, is also an asset of the company used by the employee. So, the expenditure could be considered under both categories. In such a situation, the rule to be applied is generalia specialibus non derogant-the general provision here is the one dealing with the use of the assessee's assets ; the special provision is that of perquisite. So, it would be seen that the expenses incurred in maintenance of the flats of the company should be considered only as perquisites. This aspect was not canvassed before the Full Bench of the Kerala High Court and seems to have gone on a concession.

3.9 So, now, we have to consider whether the expenses on these apartments can be considered as perquisite. Now, the requirement of Section 40A(5)(a)(ii) is that the expenses must result in the provision of a perquisite. Do repairing and maintenance expenses result directly or indirectly in the provision of a perquisite or, to be more precise, in providing rent-free accommodation In our opinion, such expenses per se do not go to provide rent-free accommodation, that being an expenditure incurred by them as the owners of the premises.

3.10 In support of this proposition, we may cite the decision of the House of Lords in Luke v. IRC 40 TC 630. That was a case of assessment of an employee in invoking the provisions of Sections 196 to 203 of the U.K. Income-tax Act, 1952. But that case is relevant to us in considering whether such expenditure in repairs, re-modelling, etc., of a residential premises given to an employee would add to the value of perquisites. The facts of the case were that a building belonging to a company was given for the occupancy to the Mg. Director of the Company.

The company paid the municipal rates, fue (sic) duty and insurance on the house and also expended considerable sums on repairs including the provision of new hot-house boiler, a fire place, a new water mains and the renewing of some plumbing works. These were treated as perquisites in respect of rent-free quarters. The House of Lords held that the owner's rates, fue (sic) duty and insurance were not expenditure in connection with the provision of living accommodation for the employee and that the other expenses were expenditure on the acquisition or production of an asset which became the property of the company and so was not chargeable on the employee. Lords Reid and Pearce also expressed the view that none of the sums in question gave the appellant more than his legal rights under the tenancy agreement and on that ground also, there could not be a charge to tax.

3.11 We are of opinion that this decision is very relevant for us on the question whether such expenditure adds to the perquisite in the shape of rent-free accommodation. We are of opinion that this cannot be so considered. Therefore, we hold that such expenditure cannot be processed under Section 40A(5).

3.12 and 4 [These paras are not reproduced here as they involve minor issues].

5. The next ground, again in connection with Section 40A(5), is that the perquisite value should be determined according to the provisions of Rule 3 of the Income-tax Rules ('the Rules') and not according to the expenditure incurred by the company. In support of the Commissioner (Appeals)'s finding that what should be considered was the amount determined in the assessment of the employees under Rule 3. Shri Doshi had relied on a decision of the Calcutta High Court in the case of CIT v. Britannia Industries Co. Ltd. [1982] 135 ITR 35. We find that this point had been considered by the Full Bench of the Kerala High Court in Forbes, Ewart & Figgis (P.) Ltd.'s case (supra), to which we have already made a reference earlier. In that case, the Tribunal found that one-third of the car expenses referred to the personal use of the car by the employees and, therefore, the High Court on that finding upheld a disallowance under Section 40A(5) of one-third of the car expenses.

The ITO, in the case before us, considered half of the expenditure to be referable to the personal use of the car by the employees. On that finding, we must restore the addition made by the ITO. We are not convinced that the provisions of Rule 3 would be applicable in this case. As the Kerala High Court has pointed out in the case cited above, the expenditure incurred on the use of the assets of the assessee by the employee to the extent of his benefit therefrom has to be considered under this head. The Kerala High Court has also approved disallowance of a part of the depreciation allowance in respect of these cars. Now, Rule 3 has been framed to mitigate some of the hardships caused by treating the 'relevant expenditure incurred by the company as perquisites. One of the elements of the expenditure is the expense on wear and tear and repair of the car. The rules have been framed in such a way that this type of expenditure is not reflected in the evaluation of perquisites in the hands of the employee. However, it has been made very clear in the statute that such expenditure has to be considered for the purpose of Section 40A(5). We may point out here itself the difference between the expenditure on cars and the expenditure in respect of accommodation given rent-free to the employees which we have discussed earlier. In respect of rent-free accommodation, it comes under the head 'perquisites'. In the case of a car, it does not come directly under the definition of perquisites.

That is why a different yardstick is used in respect of car expenditure and house expenditure. The decision of the Commissioner (Appeals) on this point will be reversed and the ITO's order restored.

6. to 18. [These paras are not reproduced here as they involve minor issues].